For All Posts About the Pricing

[cr3amy]

Profits and pricing consist of two important numbers. Fixed Costs and Variable Costs.

Fixed costs include R&D and marketing and any other sunk cost... costs that don't increase based on production. You could produce a million or you could produce one, these are costs that won't change.

Variable Costs are costs that are directly incurred with each and every unit produced. These are the costs that go into making each unit. These include parts (that $350 number you all think is so damn important) AND labor AND shipment.

Anyone remember basic algebra? y = mx + b

m = Margin = Price - Retailer Cut - Variable Costs = $800 - $200 (random guess) - $350 - labor - shipping (let's put labor and shipping at $50) = $200
b = Fixed Costs = let's say $50mil (probably higher, don't forget the marketing)
x = units sold
y = product profitability

So to reach BREAK EVEN at this margin, they need to sell $50m / $200 = 250,000 units

To reach a moderately decent profit (let's say, to earn 12% on their investment of $50m), they need to earn $50m * 1.12 = $56m. So to earn that, they'd have to sell $56m / $200 = 280,000 units.

AND keep in mind that I used easy numbers, but their margin is probably a bit lower and their fixed costs are probably higher. And what do you think the investors will think about them losing a bunch of money because they need to position themselves stronger in the market? The investors know that the average consumer can't tell the difference between any Honeycomb tablet. This can't just be a loss for them, they need to make money off this.

Can you see that the actual cost of materials is just one part of profitability? So PLEASE, stfu about the bill of materials.

 

[Maikai.Guy]

Nicely done.

And I'll add that anyone complaining about the price shouldn't be considering the most premium unit on the market.

It's like going into a Cadillac dealer and complaining an Escalade is higher priced than a Yukon.

 

[wynand32]

Another way of saying all of this is that tech companies typically run around 65% gross margins. Gross margins are revenues - manufacturing costs (components, manufacturing labor, shipping, duties, etc.). For example, Intel reported 66% gross margins for 2010 across all of their product line, and that was pretty much in line with expectations.

It's from gross margins that everything else that makes up a company is paid for, such as non-manufacturing labor (e.g., marketing, sales, HR, engineering), R&D, facilities, taxes, etc., etc. Obviously, a tech company requires higher gross margins than, say, a grocery store, in order to enjoy reasonable net profits after everything else is paid for.

So, to achieve 65% gross margins at a manufacturing cost of around $300, Motorola would have to sell the Xoom for about $825 ($825-300=525/800). That should sound pretty familiar, since really all of the reported cost breakdowns are just estimates. It's also entirely possible that Motorola has actually sacrificed gross margins a bit to hit a price point of $799 if their costs are really this high.

One of the things Apple enjoys is the ability to make huge component purchases and drive down labor costs because of their volumes and cash assets. They're pretty darn smart at running their supply chain, doing things like using the same processor (the A4, say) across many different products and thus achieving even higher economies of scale.

That means that Apple has lower costs than just about anyone else (except maybe HP, Dell, and Acer), and yet their pricing for equivalent models is the same as what's expected for Motorola. For example, the 32GB iPad 2 wifi-only is $599, the same as is expected for the Motorola 32GB Xoom wifi-only.

And that means that rather than Motorola being "greedy" and trying to get such "huge" (although really, industry-standard) profits by charging such "high" prices, it's really Apple that's "gouging" the consumer. After all, they could always price lower and make the same profits as Motorola.

Of course, in fact, nobody's gouging anyone. Motorola is pricing things as they must in order to be profitable, and Apple's enjoying the benefit of their intelligent decisions over the past few years. And if companies can't make these sorts of gross margins, then ultimately we'll see this technology disappear, because it costs a great deal of money to create it.

 

[terrain]

Its called zero profit or negative profit to gain market share of a projected multi billion dollar tablet market. When you enter a market with zero market share and the number one has 80 percent you face an up hill battle if you are priced above the competition.

 

[cr3amy]

Its called zero profit or negative profit to gain market share of a projected multi billion dollar tablet market. When you enter a market with zero market share and the number one has 80 percent you face an up hill battle if you are priced above the competition.

This is true if you're in a market where you can differentiate. Within a year Motorola will not be differentiated in consumer minds from any other Android tablet maker. Consumers won't know the difference between a Motorola, an HTC, a Samsung, or an LG tablet. You can't think of this as Android gaining market share, and because of that, nobody can afford to make an unprofitable move.

 

[wg#AC]

Something else you guys need to keep in mind on the ipad there is only 1 button on the front and a rocker on the side and since they all use the same proprietary plug they have very little add on to cost to what is inside. Ie easy to assemble. Now with Xoom you add the door for the memory card and sim card a different connector for charging and you force your manufacturing cost to go up. Ie harder to assemble. So even if apple used the same parts as the Xoom they would still need to charge more for those parts to be added. Hope this is making since it is 3am and I should be in bed instead of on my Xoom.

 

[pearlmikejam]

Well done OP.

The flip side of this all is that most of the complaints about the price are not strictly that the price is too high, but that the price is too high relative to the quality and performance (value). When one goes about buying the most premium unit on the market, it is not expected that unit to perform poorer than the competition. If I buy an Escalade, I do not expect the stereo to crash every day when the Yukon stereo works fine.

 

[barkomatic]

It doesn't matter how much the materials, R&D and engineering cost -- or how much the price can be justified based on these factors. If the device is not a good value relative to the competition its not going to do well.

The Xoom *will* be a good value when it finally reaches its complete form, but that won't be for awhile.

 

[cparker5]

The OPs simplistic run down of things does not take into account how many they make that are returned or just not sold.

So if they make and sell the 280,000 units they could theoretically make the profit you outline, but to actually sell 280,000 units they may need to actually make 400,000 units.

 

[dsignori]

This is not rocket science here. To sell more units they need to provide TO THE AVERAGE CONSUMER (read: not to Android geeks) a compelling reason not to get an iPAD and to get this. Specs generally don't matter against an established market leader in this arena (and comparison of XOOM specs to the iPAD 2 is closer anyway). 1 way to fight is on price. The XOOM isn't fighting on price. We'll see how well they do ..

Study: 82% of future tablet buyers will buy an iPAD

 

[cparker5]

This is not rocket science here. To sell more units they need to provide TO THE AVERAGE CONSUMER (read: not to Android geeks) a compelling reason not to get an iPAD and to get this. Specs generally don't matter against an established market leader in this arena (and comparison of XOOM specs to the iPAD 2 is closer anyway). 1 way to fight is on price. The XOOM isn't fighting on price. We'll see how well they do ..

Study: 82% of future tablet buyers will buy an iPAD

This is what I said about a month prior to the release of the Xoom. They made it clear that price was not going to be it and in my eyes that is what it needed to be. $800 is too much for the average person and thus until there is a reason to get the Xoom (any any other Android tablet) over the ipad customers won't.

I think this thing would be hugly successful if after Flash is installed and the SD Slot is activated they bring the price down to $600 and the WiFi to $450. But that might be too low for them to feel it would be a win.

 

[Eisodos Zao]

The reason Android's been winning the battle on the smartphone front is because early, and even most current premium Android phones are as much, if not cheaper than their iPhone counterparts, whether from price of phone or price of contract or both. They took early hits in order to establish themselves and now they're starting to see the profits from it.

In the tablet world, they're trying to have their cake and eat it too. Starting with the cell networked model (in the case of both the Galaxy Tab and Xoom) is really the backwards way of doing things, since only about half of their customers actually want to use their tablets on the go without having a MiFi or similar device. What makes the company money in the tablet world ends up being the WiFi only model, and we have yet to even see that for either Motorola OR Samsung.

Also, while $600 under contract is fantastic (especially since VZW has started to waive activation fees on tablets), $540 without a cell radio is actually gonna move units for Moto and $500 for WiFi only/16GB gives them a chance of actually landing on the map before all the other Google Experience Device tablets land and the customer will just sit there and go "Eenie, meanie, miney, mo" and then all these companies are gonna be pissed because their sales for the first year or so are gonna be split between 4+ manufacturers.

 

[cr3amy]

This is not rocket science here. To sell more units they need to provide TO THE AVERAGE CONSUMER (read: not to Android geeks) a compelling reason not to get an iPAD and to get this. Specs generally don't matter against an established market leader in this arena (and comparison of XOOM specs to the iPAD 2 is closer anyway). 1 way to fight is on price. The XOOM isn't fighting on price. We'll see how well they do ..

Absolutely right. They needed good marketing. And the marketing so far has been something between awful and dismal. In fact, I'm going to make a thread about their marketing...

 

[milominderbinde]

...Anyone remember basic algebra? y = mx + b

m = Margin = Price - Retailer Cut - Variable Costs = $800 - $200 (random guess) - $350 - labor - shipping (let's put labor and shipping at $50) = $200
b = Fixed Costs = let's say $50mil (probably higher, don't forget the marketing)
x = units sold
y = product profitability...

Look at your basic algebra formula again, in this case it would be "-b"

And the other formulas would be:

Failure = $800

Success = $500

 

[cr3amy]

Look at your basic algebra formula again, in this case it would be "-b"

Ah true. Thanks!